From the August 2010 issue of Research Magazine • Subscribe!

August 1, 2010

Precious/Base Metals: Still Shining

As markets encounter renewed volatility, metals such as gold and silver continue to act as safe havens, equity analysts explain.

Frank Holmes
U.S. Global Investors
800-873-8637

Gold: For the week ending July 9, spot gold closed at $1,211.60 per ounce down, unchanged for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index gained 3.14 percent. The U.S. Trade-Weighted Dollar Index fell 0.55 percent.

Gold ETFs took the number two spot for asset gathering in June, pulling in $2 billion. Also, in the first half of 2010, these funds led all funds in net inflows, pulling in $7.3 billion as investors continued to seek out a safe haven for their assets.

Gold demand in China gained 59 percent in the first half of 2010 due to declining stock markets, governmental efforts to cool the property market, and general unstableness of the global economy fueled investor actions.

Gold's role as a reserve asset has been underlined as the Bank of International Settlements' (BIS) record gold swap highlights its risk-free position. The fact that countries in financial distress have swapped rather than sold gold suggests that they want to hold on to gold in the longer term.

CLSA, an Asian brokerage and investment group noted "the only safe investment will prove to be gold bullion, since gold is the only asset which will protect purchasing power in both an inflationary and deflationary environment."

Scotia Capital raised its short-term gold forecast to $1,500 and increased its long-term forecast by 14.7 percent due to its prediction of rising inflation and investors hedging against global debt and equity-market troubles.

GFMS, a respected precious metals consultancy group, said on July 7 that the price of gold could possibly reach above $1,300 driven by steady growth in investment demand.

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Dan Smith
Standard Chartered Bank
Daniel.Smith@sc.com

Base Metals: Base metals are moving in tandem, and the move to lower levels (in the last week of June) is worrying for bulls. The risk is that the pullback marks the resumption of a bear trend, and that key support levels will give way across the board. However, more likely is that the dips will remain limited, and upward momentum should be reestablished.

Silver: What we think will be key for silver is that we are bullish on gold for the next few months, and we believe silver will be lifted on the back of that.

What's been happening is that there have been safe-haven inflows into gold, silver and other precious metals. In terms of the sales of coins from the U.S. Mint, for example, gold sales reached their highest level for 11 years in May. Sales of silver coins were up 30 percent for the first six months of this year. It's a story for both markets.

If you talk to fund managers, they tend to prefer gold, and they also look at the gold-to-silver ratio. What tends to happen is that when silver looks really cheap relative to gold, then you will see some fund managers pick it up, as well as investors. At the moment, the ratio looks quite cheap for silver, and this suggests that there is some upside from here.

It's not too late to get into silver. We see some upside. Our forecast is for $22 an ounce for the fourth quarter. That's another 10-15 percent upside from where we are now.

There are more legs in this rally, although we may be close to a peak late this year or early next year. I think it's certainly worthwhile getting into gold and silver at the moment.*

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Evan Smith
Brian Hicks
U.S. Global Investors
800-873-8637

Silver: We think silver will likely be pulled up along with gold as concerns about currency debasement and fiscal issues remain in the forefront. Ultimately, silver (like gold) will likely trade higher between now and the end of the year.

Copper: Copper is a different story, because it is more dependent on economic activity. With China, the world's largest user of copper, continuing to decelerate in terms of activity, it's unlikely we will see much appreciation in copper prices between now and year-end. However, our long-term outlook on copper remains constructive.

*Silver comments were aired on Bloomberg Television on July 1, 2010.

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